TrendFlex by Baseline Analytics -- Robert Palmerton, CMT
A. Trend & Sentiment
The daily chart of the S&P500 depicts the major trend. A 34-day exponential moving average helps define support to the trend.
KST (Known Sure Thing), developed by Martin Pring, is a momentum oscillator based on the smoothed rate-of-change for four different timeframes and also helps to confirm the state of the current trend.
Sentiment is measures by the 'gap' between VIX (the CBOE volatility index) and its 50-day moving average. Typically, a gap of 20% has in the past preceded a change in trend. The CBOE Put/Call ratio moves to extremes at market tops and bottoms. A close below 0.7 indicates complacency and a possible market correction, while a reading of 1.3 or higher tends to signal extreme market fear and the potential for a stock market bounce.
B. Breadth & Internal Strength
The NYSE Advance/Decline line depicts the internal strength of the market. We use a 63-day exponential moving average to define support; a cross above or below that average signals uptrend or downtrend, respectively. We also look for rising New Highs vs. New Lows.
The Summation Index is a breadth indicator derived from the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues). We look for the 400-level to mark the dividing line between an uptrend and a downtrend.
LQD vs. IEF represents corporate bonds relative to medium-term Treasuries. A sign of economic strength and positive stock momentum is represented by a rising LQD:IEF ratio.
Copper price is a proxy for economic strength, as the metal is utilized in a variety of industries. Strength in copper vs. Treasuries again is a sign of positive economic conditions and stock market momentum.
We also look at a ratio of Small Caps vs. Large Caps to assess the broadness of participation in the market trend; a rising ratio suggests increased tolerance for risk and desire to own stocks. The XLY:XLP ratio tracks the relative performance of Consumer Discretionary stocks vs. Consumer Staples, the former expected to outpace the latter as the economy strengthens.